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Financial Statements

Reviewed by Komal | Updated on Oct 05, 2020

Catalogue

Introduction

The financial statements provide a summary of the accounts of a business enterprise, the balance sheet reflecting assets and liabilities, and the income statement showing the results of operations during a certain period. These statements act as an important source of information as they provide a structured and easy to understand information regarding the business activities of an organisation.

The objective of financial statements is to provide information such as performance details, financial positions and the changes in the financial position of the organisation. It helps the user of the financial statement to make decisions. The financial statements summarise assets, liabilities, equity, income and expenses during a particular accounting period.

What is Financial Statements?

In business, the sole purpose of investing money is to earn profit and to maximise wealth. The financial position of an organisation is determined by evaluating the profit earned or loss suffered by an organisation. In addition, different users of accounting information need other accounting information too. Financial statements are created to fulfil these requirements. It provides information regarding total profit earned or loss suffered, the net income and the distribution of income. Preparation of financial statements is the final step in the accounting cycle.

Characteristics of financial statements:

  1. Understandability: Stakeholders cannot use financial information which they are unable to comprehend. An organisation has to present the financial information in such a way that it helps in understanding the underlying information. 2.* Relevance:* Through relevant information, users can evaluate whether they are making the right economic decisions or not. Also, a set of information can also be considered relevant when it has the capability of correcting or confirming the existing thought process and information.
  2. Reliability: Information is reliable only when it is free from errors especially material ones, complete and free from any bias. Relevance does not suffice for reliability. A set of information must be reliable as well as relevant in order to be useful in decision making.

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